Nation Built on Credit

Over the course of our careers we are expected to make more money as we become more skilled and experienced in our field 🙂 But with everything from food to housing becoming so expensive some people may be led to believe that we will always be losing real purchasing power because our pay raises will never grow as fast as the cost of living.  These people aren’t wrong. Here’s a graphic I put together 3 years ago that shows how prices and incomes have changed in Vancouver in the 20 years between 1990 and 2010.

Notice how the growth for expenses vs incomes are way out of whack? 😯 Are we slowly becoming poorer without even realizing it? But hold on a tick 😐 The math doesn’t quite work out. Today we can still afford to buy the same amount of food, the same sized homes, the same means of transportation, etc, as we used to. So how can Canadians put up with the substantial increase in living expenses if we don’t have the same income growth to support it? The answer lies in the chart below.

Ah, now it makes sense 😎 Our increased cost of living is mainly due to excess credit in the economy that wasn’t there before. If pineapples were the currency on an isolated island then the more pineapple trees there are, the less value each fruit will have to the local residents. Similarly this extra debt load (or credit) that we’ve been living on puts upward pressure on prices all around us because each unit of currency itself ($CDN) is worth less, which means we need more of it to buy anything. This is why we have inflation 🙂

So what can we do to limit our exposure to debt, while protecting ourselves against inflation at the same time? First, we must pay off all our high interest debts ASAP, like those 19% credit card balances. Next, we should slowly accumulate some precious metals like gold or silver, up to around 5% of our net worth. Finally we must reassess our finances from a long term perspective. For example, some people have a $12,000 emergency fund so they can sleep well at night. But from 1990 until now I haven’t ran into a single financial emergency yet. *knocks on wood* Over that 23 years an emergency fund would have lost more than half it’s original value. Meanwhile, if the money were put into a mixed bag of investments like stocks, real estate, gold, and oil, it would be worth twice as much today after calculating for inflation. 

If we look even longer term, we find that the US dollar has lost more than 95% of it’s value since a century ago. Debts and cash savings will be worth less and less over time. So I think some people should re-evaluate their priorities and balance their current emergency rations with their long-term needs to find a happy balance.  Focusing on personal debts and savings is an important part of financial management, but if we want to achieve greater prosperity, we have to think long term and focus more on the bigger picture like hedging against monetary policies 😀